Chinese Mergers Research Articles

Legal Dilemmas in the Regulation of Mergers and Acquisitions of Chinese Multinational Corporations in the Context of Comparative Law and its Response

The global economy is in a sustained recession due to the impact of the new epidemic. As one of the few economies 'bucking the trend', Chinese companies have been presented with new opportunities to invest and merge overseas. However, decades after the 'going out' strategy was implemented, China still suffers from over-regulation, lack of regulations and inadequate protection for its cross-border Mergers and Acquisitions companies, resulting in frequent failures. How to address the risks of overseas Mergers and Acquisitions by Chinese companies from a national perspective is an urgent issue. This paper compares Chinese Mergers and Acquisitions regulations with those of other countries and examines the problems, causes, advantages of other countries and solutions for China. It is concluded that "imperfect legal norms", "restrictions between China and other countries" and "lack of fluent legal information on enterprises" are the factors that lead to the problems. The reason for this is that China is an emerging market economy that lacks the time to accumulate experience and improve. Through this analysis, recommendations are made to the Chinese government to improve regulations, taxes and remedies.

The Zone of Conformity: A Comparison of Private and State-Controlled Enterprises in M&As.

The online version contains supplementary material available at 10.1007/s11575-023-00501-9.

Convergence or divergence: how does China analyse innovation concerns in merger review?

Abstract There have been few systematic studies of how the Chinese merger review agencies have analysed innovation-related issues, including the theories of harm, the frequency of challenges and the types of remedies. Since China’s Anti-Monopoly Law (AML) took effect in August 2008, China’s merger review agencies have imposed remedies in 48 transactions and blocked two transactions. The authors have found that innovation concerns were addressed in 17 transactions where there were remedies. The innovation concerns generally focused on two broad theories of harm: (i) the transaction would reduce the combined firm’s incentive to innovate by eliminating an existing or potential competitor, or (ii) the transaction would create incentives for the combined firm to hinder innovation by rivals (eg via a refusal to license the relevant technology to rivals). The Chinese merger review agencies have raised innovation concerns in transactions that were unconditionally approved by the EU or US agencies, and have sometimes unconditionally approved transactions where the EU or US agencies identified innovation as a concern. In addition, the Chinese agencies have utilized both structural and behavioural remedies to resolve innovation concerns, whereas the EU and US agencies have preferred structural remedies.

Financial performance analysis of German firms after Chinese mergers and acquisitions

PurposeThe purpose of this study is to look at Chinese mergers and acquisitions (M&A) in Germany on a firm level. It focuses on the benefits and risks from the viewpoint of Germany. In this way, the authors want to close the research gap concerning the financial consequences of Chinese takeovers for the affected German firms. The purpose is to find out if Chinese investors show a specific behavior in terms of profitability, growth and business risks in the acquired companies.Design/methodology/approachThis paper studies the financial situation of German firms two years before and two years after being bought by Chinese companies, by analyzing accounting data of 19 target companies in six economic sectors. In this empirical study, firm performance is measured by profitability, research and development cost, liquidity and financial leverage. It is using the industry adjustment method and calculation of mean and weighted mean considering company size.FindingsOverall, German firms’ financial performance after Chinese M&A did not significantly improve, but they did not worsen either. The changes in financial ratios are different across economic sectors and company sizes. Obviously, the final performance of firms after M&A is quite diverse due to diverse company-specific targets. The results do not reflect common fears about deteriorating situations brought by Chinese involvement drawn in mass media.Research limitations/implicationsThe study lacks analysis for a longer period, ideally five years before and five years after M&A. The calculated results of industry mean may differ from the real industry mean, as components are collected from the sample companies accounting for only 70% of the market. Industry means figures are calculated for only one single point in time and assumed to be unchanged over the whole time period. The study covers mostly firms which have total assets of more than €50m, so SMEs are underrepresented.Practical implicationsOwners of German firms that are in target but have not been purchased by Chinese investors can see the trends and anticipate which group of M&A targets their firms are categorized into. If their firms belong to the group of sectors or company sizes that shows negative results of performance after Chinese M&A, they can plan to protect their firms by implementing defending strategies against hostile takeovers. If their firms are in the groups that tend to enhance performance after Chinese M&A, they may be in a good position and able to negotiate for mutually beneficial transactions.Social implicationsThe results are important for political and public discussion. It is shown that Chinese acquisitions of German firms do not have a deteriorating effect, at least not in the short-term. Therefore, the results are a good input to neutralize discussions in German society.Originality/valueThe results disagree with the few previous studies on Chinese M&A in Germany (Bollhorn, 2015; Müller, 2017; Löchel and Sächtig, 2019). While the studies of Bollhorn and Müller are based on subjective methods, the study is based on a detailed financial method. Then, in contrast to the study of Löchel and Sächtig, it is strictly focusing on Chinese/German M&A. Most existing empirical studies are focusing on cross-border M&As from developed to developing countries and there is little attention to acquisitions in the other direction (Ma et al., 2016, p. 22).

Economic policy uncertainty, hold-up risk and vertical integration: Evidence from China

Firm behavior in the presence of policy uncertainty has been a focal point of research in recent years. We examine a sample of Chinese mergers from 2005 to 2018 and find that economic policy uncertainty has a significantly positive impact on firms' propensity to engage in vertical mergers relative to other types of mergers. We apply the incomplete contract theory to explain this effect, using relationship concentration to represent relationship specificity, we find the effect is stronger for firms with a high relationship concentration and in regions with poor judicial quality. We find that this effect is more pronounced for risk-averse firms. The results remain robust in several robustness checks. The results are consistent with incomplete contract theory and demonstrate that policy uncertainty increases hold-up risk between upstream and downstream traders, causing firms to choose vertical integration to alleviate the increased transaction costs caused by policy uncertainty.

External sources of finance and value creation of Chinese mergers and acquisitions: does ownership type matter?

Purpose This paper aims to investigate the effects of external sources of finance and ownership type on the value creation of Chinese acquiring firms. Design/methodology/approach The data set consists of domestic-listed mainland Chinese firms engaged in domestic mergers and acquisitions during the period 2004–2012. Standard event study methodology and cross-sectional regression analysis are used to examine the relationship between external finance, ownership type and value creation of the acquiring firms. Findings This paper finds that whereas bank financing is positively related to the firm value of privately-owned enterprises (POEs), bank financing has a negative but insignificant influence on the firm value of state-owned enterprises (SOEs). Moreover, equity financing has a negative and significant effect on the value creation of SOE acquirers, however, this appears not to be the case of POEs. Research limitations/implications The results suggest that the capital markets in China take into consideration the discriminatory and cheap access to bank loans available to SOEs as negative signals to stock markets, which cause capital markets to punish SOEs through price depreciation. Conversely, capital markets reward POEs in respect of Chinese banks’ discrimination against POEs in bank financing. Practical implications The results suggest that the capital markets in China take into account the discriminatory and cheap access to bank loans available to SOEs as negative signals to stock markets, which cause capital markets to punish SOEs through price depreciation. Conversely, capital markets reward POEs in respect of Chinese banks’ discrimination against POEs in bank financing. Originality/value The results of this study show that external sources of finance and ownership type influence acquiring firm value in an environment where the corporate governance system is weak and the banking sector is dominated by state banks. Further reforms in the financial sector, particularly, in the corporate governance system appear warranted.

The Herd Effect and Cross-Border Mergers and Acquisitions by Chinese Firms

ABSTRACT An analysis of firm level data from 393 completed Chinese firm cross-border mergers and acquisitions (CMA) from 2002 to 2019 revealed that there was a herd effect in Chinese CMA activities. The heterogeneity factors in the host country effects on the herd index found that the political environment was a significant positive herd effect determinant and exchange rate volatility, openness degree, and cultural distances were negative determinants. This research sheds light on Chinese firm CMA decision-making, which could assist in the development of appropriate policies to assist firms achieve better performances.

Make a promise: the valuation adjustment mechanism in Chinese private target acquisitions

The valuation adjustment mechanism (VAM) is a contingent-payment contractual arrangement used in the Chinese mergers and acquisitions (M&As) market. The ‘two-direction payment’ design of Chinese VAMs can reduce deal uncertainty and generate value, especially for poorly performing companies that can use VAM contracts to boost short-term performance. I find in this empirical investigation that acquirers applying VAM terms have significantly higher market returns after addressing endogeneity. I also document that poorly performing bidders sign larger VAM contracts, pay higher bid premiums and achieve higher operating performance, and which types of firms are more likely to adopt a VAM in transactions.

Switching due diligence auditor in Chinese mergers and acquisitions

The routine financial reporting auditor (FR auditor) of an acquiring firm has the advantage of knowing the acquirer very well, however, a large portion of acquirers in China do not use their FR auditor to continue serve as their due diligence auditor (DD auditor) in the takeover process. Using a sample of 818 takeover transactions from 2004 to 2014, we find that the acquiring firms are more likely to appoint a new DD auditor for M&A, instead of using the incumbent one, when the FR auditor is not an industry specialist and the acquiring firms’ financial reporting quality is low. For low financial reporting quality acquiring firms, changing to a new DD auditor can prevent negative market reactions when firms make the M&A announcement, but firms have to pay a higher premium. Our results remain robust when using alternative definitions of industry specialisation and measures of financial reporting quality.

Research on Anti-Monopoly regulation of data merge in the era of data-driven competition

ABSTRACT Data merge as a result of mergers between organizations that hold valuable data sets can create significant competitive advantage. The existing regime of Chinese merger control is based on turnover thresholds and might not be efficient for capturing data-driven mergers raising anti-competitive concerns. Also, the existing notion of relevant market definition and market power which form the backbone of the merger review might be of little use for assessing data-driven mergers. This paper analyses whether the Chinese lawmakers should introduce the transaction value-based thresholds to block data-driven mergers that might have serious anti-competitive consequence. Comparison is made with merger notification thresholds in Austria and Germany as they are the more active European member states when it comes to competition law enforcement in the data-driven era. Besides, both Austria and Germany have reformed their competition laws in 2017 to adapt the laws to the data-driven economy era. The new Austrian and German competition laws may well serve as inspiration for China. In addition, the paper also examines the definition of product market for data and what constitutes market power for that market. This paper argues that turnover-based thresholds can be inadequate to tackle competition law concerns due to data. Thus, transaction value-based threshold as an additional threshold of merger control would be a good option. The paper also argues that the existing notion of relevant market definition should be adjusted. Furthermore, the SAMR can no longer rely solely on market shares to evaluate market power. In this context, whether the data to be acquired and to what extent the said data can provide market power to the merged entities should be taken into account.

Legal perspectives on the protection of bilateral investment between China and Switzerland

ABSTRACTGiven the rapid increase of bilateral investments between China and Switzerland over the last decade, the legal framework applicable to foreign investment has become more and more sophisticated reflecting the various interests regarding foreign investment. These interests do not only include the protection and promotion of foreign investment in order to facilitate economic growth, but also the safeguard of the effective functioning of the markets as well as the protection of national security from undue influence by foreign actors. In light of this, this paper takes a comparative law perspective on the applicable legal framework for foreign investment flowing from China to Switzerland and vice versa. By doing so, it focuses on the rights of investors under the bilateral investment treaty concluded between the two countries as well as on two ex ante review mechanisms screening transactions involving foreign investment, this being merger control and national security review. Finally, it analyzes the possibilities of Chinese investors to enter the European Union market through investments made in Switzerland and draws lessons from the Swiss experience for a future bilateral investment agreement between China and the European Union. The paper finds that, with the exclusion of ‘letter-box’ companies, Chinese and Swiss investors can benefit from a high degree of protection provided in the bilateral investment treaty between the two countries, which can be enforced through investor-state arbitration. The merger review processes in the two countries are largely comparable, except for the fact that the Chinese merger review can potentially be based on non-competition factors. Regarding the safeguard of national security, the two countries adopt very different approaches. While China provides for a review mechanism for individual transactions, Switzerland has conducted a general risk assessment screening all potential transactions in the foreseeable future. The two approaches fit the respective circumstances of the two countries. With respect to access to the European Union market, Chinese investors in Switzerland can expect favorable conditions only regarding very specific sectors, this being civil aviation and insurance. In view of negotiations of a future bilateral investment agreement with the European Union, China could notably consider extending most-favored nation treatment to European Union investors with respect to market access.

Chinese Overseas M&As in Pakistan

Chinese policies toward foreign investments have been increasingly flexible, precisely those concerning the transfer of their capital toward international markets as willed by the “Going Global” policy initiated in the early 2000s. In this flow, several cases of corporate combinations have occurred around the world between Chinese firms and others. This paper analyzes the case of Paktel and China Mobile that took place in 2007, in the era prior to the new leading Chinese initiative called the One Belt and One Road (OBOR), with the purpose of better understanding the motives and the framework of this strategic corporate behavior. After analyzing the case from the theories of firm internationalization and institution-based view, the paper suggests that the loosening of Chinese policies toward foreign investments in the beginning of the 21st century has greatly influenced the growing level of Chinese overseas investments and mostly has boosted Chinese Merger and Acquisition (M&A) deals around the world. However, in Pakistan only few cases of M&As have been recorded during the observed period. Additionally, the paper found evidence to support good firm performance in post-M&A era for the Chinese firms. These imply that policies established by institutions have an impact on firms’ organizational strategic decision-making and that Chinese firms can perform well on international markets. Due to the qualitative methodology used in this research, the suggestions and implications are limited but still provide some highlights on the effects of institution-based investment policies on firm’s strategic behaviors. Further, the paper could be extended to an analysis of the Chinese M&As in Pakistan in the post-OBOR era for more cases can be expected with the effective enforcement of the initiative in Pakistan.

Building trust in cross-cultural integration: A study of Chinese mergers and acquisitions in Germany

The phenomenon of trust and trust building has been widely researched with regard to different contexts and subjects. Nevertheless, the factors that influence trust building in mergers and acquisitions (M&As) and the way in which trust affects the post-M&A process remain unclear. This study explores trust development in the cross-cultural integration process following emerging country firms’ acquisitions in an advanced economy. A grounded theory model was developed to link the contextual characteristics of Chinese M&As in Germany that require the development of trust and the way in which managers understand sources of trust building. The perceived future uncertainty, different levels of technology and management, previous public discourses, and differences in institutional and cultural norms require the development of trust. The data reveal that a range of factors can foster trust development, including economic factors as well as emotional factors, such as mutual understanding, reliability, familiarity, and emotional bonding. A three-stage cross-cultural trust development theory is proposed, asserting that trust can be established based on economic factors, improved through mutual understanding and reliability, and further developed based on familiarity and emotional bonding. Trust development influences the acquiring firm’s behavior with regard to the transparency in information policies, the integration in decision-making, the exercise of control over the acquired firm, and the granting of autonomy in the cross-cultural integration processes.

Statistical properties of Chinese merger and acquisition network

Mergers and acquisitions (M&As) have important implications for the long-term development and profits of companies. In this paper, from the viewpoint of network science, we investigate the evolution patterns of M&As for Chinese companies. Firstly, by taking into account the M&A flows of Chinese company’s M&As for the period 2000–2017, we construct temporal directed M&A networks (MAN), then the temporal MAN are integrated into one global network (IMAN). The empirical statistical results show that the IMAN has a scale-free feature with a power-law degree distribution, is a low density and heterogeneous network. For the largest connected component (LCC), the company centrality for the M&A behaviors is calculated based on the degree, betweenness, closeness and PageRank (PR) measurements. Then we find that the correlations between the node importance and the amount of money for a company’s M&As are 0.4653 and 0.3319 for the out-degree and PR indices respectively, which indicates that the out-degree and PR measurements could be used to predict the M&A price. Finally, we introduce a multiple linear regression model to analyze the impact of these structural factors on M&As. The experimental results show that the out-degree and PR measurements are significantly related to the company’s M&As and the significance coefficient p values are 0.000 and 0.007 respectively, which illustrates that the centrality of a company could be provided with reference to make decision for managers. This work provides a way to analyze the M&As from the viewpoints of complex systems.

The community structure identification for the Chinese merger and acquisition network

The community structures of the mergers and acquisitions (M&As) could bring deeply insight on the company complex system from the viewpoint of macroscopic level. Firstly, we construct the directed merger and acquisition network (MAN) based on the M&A events which deal from 2000 to 2017 initiated by Chinese listed companies, where the nodes represent the companies and the links denote the relationship of M&As. Regarding the fact that the M&A network is a directed network, by using the Infomap algorithm, we investigate the community structures of the M&A network, and find that the network has the clear community structures with the modularity Q=0.8757. Furthermore, we present a parameter η defined as the ratio of the number of companies which belong to the same industry to the total number of companies in the community for analyzing the company industry characteristics within community. The empirical results show that there are a large proportion of companies belonging to one industry for each community, which illustrates that the characteristic of M&As is that M&As generally occur between the same industry within communities. Finally, we calculate the clustering coefficient of directed networks to analyze the clustering properties of the network with the community structures. The clustering coefficient of the network indicates that the number of triangular configuration is very few, which illustrates that the relationship of a company’s neighbors is weak. This work provides insight to structural properties of directed networks based on the M&As from the perspective of complex systems.

How Do Chinese Firms Perform Before and After Cross-Border Mergers and Acquisitions?

ABSTRACT To evaluate the financial performance of Chinese cross-border mergers and acquisitions (M&As), this research examined 86 cross-border M&As from 2007 to 2012, which included the 5 years before and the 5 years after the merger dates. Eighty-one domestic M&As were also chosen as the control group to compare the performances of cross-border and domestic M&As. The difference in difference (DID) results revealed that, in general, the cross-border M&As did not improve the firms’ financial performances and that the domestic M&As performed better. The feasible generalized least squares (FGLS) regression results indicated that the CNY exchange rate appreciation, infrastructure，labor costs, formal institutional distances, and technological levels in the host countries are significantly related to post-merger performances over the long run, and firms that acquired resource-oriented foreign firms had better long-term financial performances; however, state-owned firms were more likely to have worse profitability after the cross-border M&As, and host countries located in “One Belt One Road” (OBOR) regions showed poorer post-merger performances. The study results could be of valuable assistance to Chinese firms considering future cross-border M&As.

External sources of political connections: Financial advisors and Chinese acquisitions

AbstractThis study considers the effects of an external form of political connection, namely, politically connected financial advisors, on the value creation of Chinese acquiring firms over the period 2004–2014. Using data consisting of 1,623 Chinese mergers and acquisitions (M&As) deals, we show that politically connected financial advisors create significantly higher market value for acquiring firms, after controlling for firms' own political connections and reputation. Further analysis indicates that the appointment of political advisers can improve an acquiring firm's long‐term industry‐adjusted operating performance and help acquirers reduce bid premiums. We show that private firms and stock‐pay acquisitions are more likely to appoint politically connected financial advisors in M&A transactions, whereas our findings remain unchanged after controlling for endogeneities.

Big Chinese chemicals merger likely

A long-rumored merger of two of China’s largest state-owned chemical firms seems to be moving ahead. According to the Chinese news organization Caixin, the State-Owned Assets Supervision & Administration Commission is engineering the merger of the chemical trading and production firm Sinochem with China National Chemical Corp. (ChemChina), a conglomerate that owns dozens of chemical plants. Sinochem’s chairman, Ning Gaoning, will oversee the merged company, Caixin reports. The merger is reportedly China’s condition for endorsing ChemChina’s $43 billion acquisition of Syngenta.

Can material asset reorganizations affect acquirers’ debt financing costs? – Evidence from the Chinese Merger and Acquisition Market

In this paper, we investigate whether material asset reorganizations (MARs), a special form of merger and acquisition (M&A) transactions, can affect the acquirers’ cost of debt financing. Further, we examine the effect of acquiring firms’ accounting information quality on the cost of debt and on the association between MARs and debt costs. We predict that compared to conventional M&As, large-scale acquisitions through MARs can generate a much greater influx of assets from target firms. This raises the acquirers’ asset collateral and thus reduces the cost of debt. Because the quality of accounting information is a key factor affecting the cost of debt, we suggest that it has a spillover effect on the debt-cost effect of MARs. Using M&A transactions by listed companies in the Chinese A-share market from 2008 to 2014 as our sample, we find that MARs are associated with a higher asset collateral and lower ex post cost of debt than conventional M&As. Furthermore, we show that the acquiring firms’ accounting information quality has a significant negative effect on debt costs, and the negative association between MARs and the cost of debt is more pronounced when accounting information quality is higher.

Top-tier financial advisors, expropriation and Chinese mergers & acquisitions

The empirical literature contains mixed evidence regarding the relationship between advisor reputation and returns in mergers and acquisitions (M&As). However, very few studies consider the detrimental effect of expropriation by controlling shareholders and value creation role of top-tier financial advisors. We revisit the role of financial advisors in M&As by examining whether and why top-tier advisors affect acquisition quality in the Chinese market, finding that they generate substantial value for acquiring shareholders, though value creation is lower for high expropriation-possibility acquirers. We also show that top-tier financial advisors help improve operating performance and reduce bid premiums. The results contribute to the takeover literature by shedding new light on the role of financial advisor in acquisitions.